Advisory support for the board.

• Author: Newquist, Scott C.
• Position: Board Processes - Engagement of ongoing advisors can be beneficial to boards of directors

INVESTORS, regulators, exchanges, the courts, directors and officers insurance providers, and the press are expecting all directors to exercise greater diligence in their responsibilities. These concerns are growing as evidence of financial irregularities, compensation excesses, and ethical lapses mount in a growing list of companies--resulting in fines, damage to corporate reputations, and a general loss of shareholder confidence in managements and boards. Although these demands are not unreasonable when measured against directors' longstanding and considerable legal and ethical responsibilities, they may be unreasonable when measured against the available time and resources that directors have been able to bring to bear on their responsibility to govern increasingly complex businesses.

Barring a sea change in regulation, law, and our capital markets system, which seems unlikely after passage of the Sarbanes-Oxley Act of 2002, directors will have to address the incongruity between their responsibilities and the resources available to them.

To solve this dilemma, directors will have to choose between: (1) committing to an exponential increase in their own time and effort, (2) engaging ongoing outside advice to leverage their time, or (3) failing to provide adequate value to the company and possibly failing to fulfill their fiduciary obligations. The last choice is clearly not a real option, and for most independent directors, an exponential increase in time commitment is likely to be impossible.

The engagement of ongoing advisers who bring both expertise and staff to collect and analyze information, thereby leveraging directors' time to make them a more valuable resource to their companies and a more effective fiduciary for shareholders, could be a viable solution.

Objections raised

Possibly because this concept is new, many directors' and managements' initial reaction is to object to it, despite mounting evidence that "business as usual" for boards will no longer be tolerated. Objections include the following:

1. Relationships are critical and tension must be avoided. A good relationship between the board and management is required for success. Outside advisers to the board jeopardize this relationship.

2. We already trust management. If directors believe they must review details and ask tough questions, they must not trust management. They should either resign as directors or replace management.

3. Directors should not manage. Involvement by directors in information gathering and analysis implies that directors are stepping beyond the bounds of oversight into a management role. This is not acceptable.

4. Independent information is not required. Company staff can provide directors with all the information they need; therefore, there is no need for directors to collect and analyze information from their own independent sources.

5. We simply need better guidelines. New guidelines from the NYSE and Nasdaq and the Sarbanes-Oxley Act improve the definition of independence, require a higher level of expertise on the audit committee, and make outside auditors more accountable to the audit committee. These steps have already solved the governance problem.

6. Directors need advisers only in specific situations. Directors do not need this level of assistance, and providing them with staff is inappropriate. Outside experts can be hired for specific issues when needed. Ongoing advice should be given only to management.

   Necessary reliance

   These six reactions (and others heard less often) are not valid and do not stand up under a detailed and honest assessment of directors' duty of care in representing shareholders or their obligation to be a value-added resource for management.

   Duty of care (and duty of loyalty) is critical to protecting directors and allows them to rely on the business judgment rule. Directors need not have made the "right" decision when viewed with hindsight, nor...